Stock Market Should Rally Into New Year

YOUR MONEY - STOCKS

Last October, when the Dow had fallen below 7,500, I predicted we would be back to record territory by the end of the year. So I missed by a month or so.

The big question now: Will we continue our upward surge? Although there is bound to be some profit taking, I am looking for the markets to continue moving up well into 1999.

The blue-chip index, still giddy from the effects of a triple round of rate cuts by the Federal Reserve, has made a stunning turnaround from its nearly 20 percent summertime slide.

The euphoria over the Fed's action has apparently removed much of Wall Street's concern regarding recession, declining profits and, yes, even the impeachment hearings in Congress.

The Thanksgiving holiday season, long viewed as the beginning of the holiday shopping season, has also tended to propel the equities market.

Newly released economic forecasts indicate the U.S. economy will weather the various global financial crises while maintaining steady growth and low inflation well into 1999. Although such forecasts paint a rosy picture for the stock market, forecasts are not infallible. Moreover, it is not beyond the realm of possibility for the financial markets to move both chaotically and with little rhyme or reason. Yet, the past can shine a light of understanding into the dark abyss of the future.

Consider, for example, who benefited the most from the current bull market. The investors with the greatest success were the ones with the discipline to dollar-cost average well before the market began its meteoric rise.

More recently, it was those investors with the foresight to dollar-cost average last October when the Dow went below 7,500. Although the merit of long-term investing in stocks is clear, today's financial markets have left many investors, including those who claim years of experience, confused and even a little dazed.

The most important lesson to learn from the volatile market of 1998 is that it's difficult, if not impossible, to do well jumping in and out of the stock market. A patient, long-term investment approach was the path to follow throughout the great bull markets of the 1980s and '90s.

Therefore I will reiterate a point I have emphasized repeatedly over the years: You cannot outsmart the market. And there is really no point in trying. Even if lady luck is in your corner, Uncle Sam is not, and his fair share will dramatically reduce your returns.

Furthermore, the performance of individual securities is unpredictable, and even the performance of a group of securities is unpredictable in the short term. It is not until you view the performance of a group of securities over increasingly longer periods of time that forecasts can become truly meaningful.

To understand this predictability, you only have to look at corporate earnings. As operating earnings grew in the '90s, they have allowed stock prices to rise, almost without interruption. At the same time, the ratio of prices to earnings has remained in a more or less tolerable range, albeit at the high end of that range.

If you combine earnings with relatively low interest rates, it becomes possible to make the argument that stocks were not overvalued. But earnings alone could not have caused some stock prices to have risen as rapidly as they have. Investor psychology has also played a significant role. For proof of this, you only have to glance at the Internet stocks.